NZ First Impressions: RBNZ Monetary Policy Review, October 2023
The RBNZ left the OCR unchanged at 5.5% as expected. The tone of the accompanying statement is somewhat more dovish than expected.
- The RBNZ left the OCR unchanged at 5.5% as expected.
- The tone of the accompanying statement is somewhat more dovish than expected.
- The RBNZ assessment of the balance of risks looks unchanged from the August Statement
- We think this means that the RBNZ is less likely to raise the OCR by 25 basis points at the November Monetary Policy Statement than we forecast.
- Key factors that will determine the probability and size of a November tightening will be the outcome of the Q3 CPI due 17 October and the Q3 Labour market reports due 1 November.
The RBNZ left the OCR unchanged at 5.5% and communicated a relatively dovish statement on the future OCR in the accompanying statement.
The overall tone of the statement and record of meeting displayed a similar degree of concern regarding the persistence of inflation pressures than previously communicated. Market pricing for around a 60% chance of a 25-bps tightening at the November Monetary Policy Statement looks too hawkish and is now adjusting.
The MPC’s seems to still be concerned about the possibility of persistent inflation pressures and that the economy might not weaken as fast as required in the short term. The MPC noted that GDP was stronger than they expected in the first half of 2023. However, the RBNZ retains confidence that the required amount of slowdown will ultimately occur in light of recent indicators such as the QSBO and PMI indicators. Notably, concerns around increased house prices are not as prominent as in our own assessment with the MPC wanting to see how house prices evolve in the summer period when more activity usually occurs. The MPC seems to also take comfort from the increase in mortgage rates that has occurred since August as global long-term rates have increased, helping add disinflationary pressure.
Medium term growth and inflation pressures are seen as being held in check by the continued slowing of the global economy and China in particular given that commodity prices continue to be lower than last year.
We see this statement as more dovish than our expectations. We anticipated the RBNZ would craft a statement that broadly endorsed current market pricing for around a 50/50 chance of a 25 bp rate rise in November. This statement suggests that view was too hawkish. By not communicating any further concern on the inflation outlook means the hurdle for a November tightening remains high.
While we continue to see a 25 bp rate hike in November at this stage, but this must be a lower probability than previously thought. The Q3 CPI and Labour market data will be key to the probability/size of that rate increase as also will global economic and financial markets developments.
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RBNZ October 2023 policy statement
Official Cash Rate remains at 5.50%
4 October 2023
The Monetary Policy Committee today agreed to hold the Official Cash Rate (OCR) at 5.50%.
Interest rates are constraining economic activity and reducing inflationary pressure as required.
Demand growth in the economy continues to ease. While GDP growth in the June quarter was stronger than anticipated, the growth outlook remains subdued. With monetary conditions remaining restrictive, spending growth is expected to decline further.
Globally, economic growth remains below trend and headline inflation has eased for most of our trading partners. Core inflation has also eased, but to a lesser extent. Weakening global demand is putting downward pressure on New Zealand export volumes and prices. Apart from oil, global import prices have eased.
While the imbalance between supply and demand continues to moderate in the New Zealand economy, a prolonged period of subdued activity is required to reduce inflationary pressure.
There is a near-term risk that activity and inflation do not slow as much as needed. Over the medium term, a greater slowdown in global economic demand, particularly in China, could weigh more on commodity prices and New Zealand export revenue.
The Committee agreed that the OCR needs to stay at a restrictive level to ensure that annual consumer price inflation returns to the 1 to 3% target range and to support maximum sustainable employment.
Monetary Policy Committee record of meeting
The Monetary Policy Committee discussed recent developments in the New Zealand economy. The Committee agreed that monetary conditions are restricting spending and reducing inflationary pressure. While supply constraints in the economy continue to ease, inflation remains too high. Spending needs to remain subdued to better match the economy’s ability to supply goods and services, so that consumer price inflation returns to its target range.
Global economic activity remains below trend. While global growth has been resilient in recent months this momentum is beginning to fade. Recent data show continued regional variation, with economic strength in the United States but slow momentum in Europe and historically low growth in China. Easing global demand is placing downward pressure on New Zealand exports, in terms of both volumes and prices. Global oil prices have increased, but other import prices have been slightly lower.
Globally, headline inflation continues to fall but declines in core inflation are more gradual and uneven across economies. In discussing recent central bank policy moves, the Committee noted that policy rates are now expected to remain at restrictive levels for a sustained period of time, in order to bring inflation back to respective central bank policy target levels.
The Committee discussed domestic economic developments. The rebound in June quarter GDP data was larger than anticipated, partly reflecting the effects of population growth from high net immigration and momentum in household spending. However, demand growth in the economy continues to ease broadly as expected. The more recent Performance of Manufacturing and Services Indices (PMI and PSI) and NZIER Quarterly Survey of Business Opinion (QSBO) show easing capacity pressures. The Committee noted that with monetary conditions remaining restrictive, they expect to see further declines in per capita spending and for GDP growth to be subdued.
Financial conditions have continued to tighten with an increase in wholesale and retail lending rates. Members noted that the average mortgage rate on outstanding loans continues to rise, and debt servicing costs as a share of income are still increasing. Members also noted that house prices were slightly higher, but that this was on low sales volumes. House prices remain around estimates of sustainable levels.
Members discussed the Pre-election Economic and Fiscal Update 2023 (PREFU) and noted that total government spending as a share of potential GDP is still forecast to decline, but by less than previously expected. Members noted the material increase in government investment over the medium term, due to infrastructure resilience requirements.
The Committee discussed the balance of risks for inflation, output, and employment. Members agreed that the risks to the outlook remained similar to those discussed in the August MPS.
In the near term, members agreed that the risk of greater resilience in domestic demand remained. Upside surprises to, or greater than expected demand-side stimulus from, migration could sustain growth momentum for longer. More resilience in domestic demand could slow the pace of expected disinflation. An easing in wage inflation could take longer, but members noted the lack of recent wage data. The recent rise in global oil prices could increase domestic costs over coming months, risking headline inflation being higher than expected.
Over the medium term, the Committee agreed downside risks around the outlook for global growth remain. A greater slowdown in global growth could see further falls in the price of non-oil imports. Weaker global demand, particularly from China, would likely weigh further on commodity prices and therefore on export revenues.
The Committee discussed the risks around the lagged effect of previous monetary tightening on households and businesses. Recent data show continuing weak demand for credit other than for business working capital requirements. Members agreed the ongoing slowdown in economic activity is not even across sectors of the economy, due to global factors and the varied impact of high domestic interest rates. In particular, the Committee noted that pockets of stress have emerged for some in the household, commercial property, and agricultural sectors.
The Committee agreed that in the current circumstances, there is no material trade-off between meeting the Committee’s inflation and employment objectives and maintaining stability of the financial system. Members noted that debt levels are high in some parts of the economy and debt servicing costs have increased. While broad indicators of stress have increased, non-performing loans remain at low levels.
In discussing their Remit objectives, the Committee noted inflation is still expected to decline to within the target band by the second half of 2024. While employment is above its maximum sustainable level, recent indicators show that employment intentions are flat and difficulty in finding labour has reduced.
The Monetary Policy Committee discussed the appropriate stance of monetary policy. The Committee agreed that interest rates may need to remain at a restrictive level for a more sustained period of time, to ensure annual consumer price inflation returns to the 1 to 3% target range and to support maximum sustainable employment.
On Wednesday 4 October, the Committee reached a consensus to maintain the Official Cash Rate at 5.50%.
Attendees:
Reserve Bank members of MPC: Adrian Orr, Karen Silk, Christian Hawkesby, Paul Conway
External MPC members: Bob Buckle, Peter Harris, Caroline Saunders
Treasury Observer: Tim Ng
MPC Secretary: Kate Poskitt
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